The implications of the treatment of uncertainty in the definition of optimal investment criteria for irreversible allocations of unique environmental resources are considered herein. This analysis argues that the single-project, orientation of conventional cost-benefit analysis can lead to inconsistent decisions because it fails to take account of the potential for risk pooling across projects. In the models discussed in this paper uncertainty arises because the planner must estimate the net benefits associated with a mix of developed and preserved natural environments. The results suggest that the criteria for optimal investment plans will be affected by those factors influencing this uncertainty. Both the scale and timing of optimal investments may be altered from those prescribed with the conventional (Fisher-Krutilla-Cicchetti rule) framework when the potential for risk pooling is introduced. Thus, it is important to consider as a part of the specification of the objective function the factors which give rise to uncertainty.
ASJC Scopus subject areas
- Economics and Econometrics
- Management, Monitoring, Policy and Law